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Can workers' comp work?

Weakened by soaring medical costs, litigation and fraud, workers' compensation systems are in need of repair. Maybe it's time to marshall all the forces for a major overhaul.

Workers' compensation, the 80-year-old pact between employers and their workers, is critically ill. It's been sick since the mid-'80s, and there's very little evidence of immediate recovery despite diligent attempts at treatment by the 47 states that subscribe to the system.

Legislature have been doctoring workers' comp for more than a decade now, prescribing one kind of reform or another. What ails the workers' compensation system--excessive cost, fraud, waste, expanding definitions of eligibility for compensation and an outdated, understaffed and underfunded administration system--only gets worse every year.

The philosophy behind the workers' compensation system is sound: It is an agreement between an employer and his workers that the boss will pay medical costs and wages for lost time if injured workers agree not to take their case to court.

The objectives of most workers' comp legislation are sound, too: to provide immediate and sufficient income to victims of work accidents and their families without expensive, time-consuming litigation, to encourage maximum employer interest in safety and rehabilitation and to promote studying the causes of accidents.

For many years, the system was a small, cheap program costing employers less than 1 percent of payroll. Through the 1970s, after a congressional commission found serious deficiencies in the program, states acted to adopt recommendations for improving coverage, income benefits, medical care and rehabilitation, and safety and delivery systems. These changes, especially the increase in benefits and coverage (which the commission found extremely low), certainly enlarged the program.

The real cost drivers in the '80s, however, were increased medical care costs, increased litigation (especially cases to recover loss of income), expansion of the kinds of injuries covered, such as mental stress, and growth of other occupational diseases (carpal tunnel syndrome and asbestos-related disorders).

All this has steadily driven up costs. In 1972 it cost an average of $93 to cover a worker. By 1987 employers were paying $430 per worker; by 1990, $500. Similarly, the average medical claim on lost-time cases was $2,100 in 1981. In 1989 it had jumped to $5,400--a 157 percent increase.

The latest treatment for the ailing workers' compensation program calls for a comprehensive examination of the entire system. There've been a growing number of special sessions in recent years--Texas, Oregon, Alabama, Maine, New Mexico; a growing number of special task forces and study groups--virtually all states have one or the other; and a growing number of comprehensive bills--introduced in California, Oregon, Texas and Colorado. California Senator Bill Greene believes workers' compensation cannot be saved until legislators figure out its relationship to other social insurance programs and employer-sponsored benefits.

The biggest hindrance to a thorough analysis of the problem is that states have not had the data necessary to make decisions. Information is missing on litigation rates and the effectiveness of cost-containment measures. "Even if it costs money, this is a very important and necessary step. We have to have objective data to make the decisions that need to be made," says Peter Barth, a workers' compensation expert at the University of Connecticut.

The massive amount of data currently collected by the insurance industry is used to analyze rates, but does not necessarily answer questions about system performance or do kinds of cost-benefit analysis useful to public policy-makers. These databases do not provide information on self-insurers, significant players in the market.

Before legislators can formulate sound public policy for long-term reform of the system, independent databases must be established. Until then, they are relying only on anecdotal information and data provided by interest groups concerned with preserving or increasing their piece of the pie.

But who's going to collect the data? Workers' comp agencies, like insurance commissioners' offices, are very much as they were 20 years ago. Low-budget, understaffed, many not yet computerized, they are administering and monitoring a sophisticated and complex activity, and they are simply overwhelmed by the charge.

The specific information that state legislators need--where the money actually goes--is equally important to those who administer the system, says Allyn C. Tatum, president of the International Association of Industrial Accident Boards and Commissioners. "Unfortunately, in the vast majority of states we don't have this information because there's not the staff or resources to gather it," he says.

Tatum says workers' comp administration problems could reach a crisis in the very near future. Spurring that crisis is the rapid growth in self-insurance. Workers' comp agencies are responsible for regulation of self-insurance, Tatum says, and most states have "only one or two people to do it."

If the system didn't have enough problems, it also has a health care component that it out of control. Workers' comp issues are so closely tied to the crisis in health care that the program can no longer remain isolated from the larger problem. Health care costs now account for at least 40 percent of the premium paid by employers to insure or self-insure their work injury risks (some states estimate these costs as high at 55 percent). Over the last 10 years, health care costs in the workers' compensation system have risen faster than those outside the system--both of which have increased substantially--mainly because of cost shifting.

When health care costs escalated in the 1980s, insurers and the federal government implemented restrictive cost containment measures for many private insurance programs and Medicare and Medicaid. So the workers' compensation system, with relatively insignificant health care costs for so many years, became a target for cost shifting. Hospitals, doctors and rehabilitation therapists looked for payers without cost restrictions.

Edward L. Holloway, president of Associated Industries of Kentucky, says that "workers' comp offers a line of least resistance [to providers]. Government programs such as Medicare and Medicaid have such restrictive fee schedules and reimbursement policies that health care providers are forced to load costs onto patients whose coverage is not so closely regulated." For example, says Holloway, a carpenter bruises his hand, and when he seeks treatment he's given unnecessary tests. The bill can be driven up close to $3,000."

A 1990 study by the Minnesota Department of Labor and Industry found that the same treatments for back injuries and sprains cost more than twice as much when charged to workers' compensation than to a Blue Cross program whose treatment lasted longer. According to Lisa Thornquist, project manager for the study, workers' comp health care costs are higher because the cash benefits paid to workers are dependent on doctors' opinions based on numerous tests. It is difficult to determine if unnecessary testing is taking place, but this could constribute to higher costs, she says.

Looking for ways to stop cost shifting and cut down on health care costs in the workers' comp system, state law-makers are naturally looking at the strategies being used in the health care arena generally. Some states--California, Oregon and Florida--are considering programs that would eliminate the barriers between health care programs. They would combine the fragmented health care components of workers' compensation, auto and health coverage in order to eliminate costly disputes over who or what caused an illness or injury.

California Insurance Commissioner John Garamendi, a former legislator, calls the present system a "patchwork quilt of health care coverage." He says that today the hodgepodge costs too much money, offers too little security and, worst of all, doesn't cover those who need it most.

What California needs, Garamendi says, is a 'guarantee of a comprehensive, round-the-clock health care policy for all citizens delivered by a system that contains costs through maximized competition among providers, elimination of administrative waste, improved consumer choice and a legislative incentive to hold the line on health care inflation." Such a system could be financed by a "modest premium paid by all California employers and employees," he says.

Colorado Insurance Commissioner Jo Ann Hill, a member of the National Association of Insurance Commissioners' Task Force on Workers' Comp, says alternative to the system are a top priority for insurance commissioners and state legislators. At least 15 states are looking at the 24-hour coverage concept that Garamendi proposes, she says, and although there are differences over how such a system should be implemented, "some of the major insurance companies are interested in the cost savings inherent in the concept."

Other states are looking for a cure in the area of medical cost containment. Compared to the flurry of activity elsewhere in the health care market, until recently virtually no workers' comp law regulated the delivery of health services, with two exceptions--medical fee schedules and limits on employees' choice of physician. But in the last few years lawmakers have started to look seriously at this alternative and are considering such strategies as pre-admission certification, retrospective utilization review and diagnosis-related group (DRG) systems. These save by making certain that treatment is appropriate for the injury and is not oversued or mis-used. Among the innovations,

* Washington and Utah require the patient to obtain prior approval from the payer for expensive services such as hospitalization and surgery.

* Michigan and Washington use bills and medical records to monitor the appropriateness of treatment .

* New York and Washington reimburse payers for inpatient hospital care using a DRG system that assigns a patient's condition to a specific diagnostic category for which the hospital is paid a fixed amount, irrespective of the actual cost of treatment.

* New York also looks at medical records to track the appropriateness of treatment and physician fee schedules that cap charges for specific treatment.

* Florida hopes to learn just how much can be saved in medical costs through the first managed-care pilot project in the country. More time is needed for a complete evaluation, but Robbie Simpson, project manager, anticipates a more efficient delivery of services with significant savings. She says research in the use of managed care in general health care programs has shown a savings. The pilot covers 25,000 people and is studying use of both health maintenance and preferred provider organizations.

If workers' compensation is going to get better, states also have to find ways to eliminate fraud and abuse. Fraud investigations in California, Colorado and other states have exposed serious problems. The California investigation uncovered an organization scam that encouraged healthy people to file comp claims. The New York Times estimated in a December report that 20 percent of workers' compensation claims are fraudulent. Although the figure is questioned by many experts, fraud and abuse do exist on the part of employers as well as workers. Investigators in Oregon followed injured workers receiving workers' compensation for permanent total disability and videotaped them working as roofers. In Colorado a news team uncovered similar cases, including a construction worker on permanent total disability who was filmed jet-skiing.

But the Colorado Compensation Insurance Authority, which provides workers' comp insurance for 40 percent of Colorado companies, says employer fraud is even more costly than fraud by workers. Employer fraud consists mostly of hiding payroll to reduce the cost of premiums and misclassifying workers into categories that require lower premiums, says Jane McGill of the CCIA.

At least eight states--California, Colorado, Connecticut, Florida, Louisiana, Massachussetts, Nebraska and Rhode Island--have recently passed laws aimed at reducing fraud. Approaches include:

* New investigation units to track down allegations of fraud and transmit information to the appropriate officials for prosecution.

* Increased penalties against individuals who make or attempt to make fraudulent claims.

* Provisions that an insurer or self-insured employer may take an offset or credit for the previous benefits or payments that have been obtained fraudulently against any future benefits due the workers.

* Excluding benefits or payments obtained through fraud from any data used for rate-making or dividend calculations by an insurer or the insurance commissioner.

Preventing illness and accidents in the workplace was a key component of the original workers' compensation plan, a goal that was to help employers and workers alike. Sadly, this is a goal that has not bee met. Jim Ellenberger, assistant director of the AFLCIO's Department of Occupational Safety and Health, says too little is being spent for accident prevention. "Loss-time injuries are up substantially and so are injury rates," he says. "State and federal agencies spent less than $400 million in 1990 on safety programs. That's less than 1 percent of the total cost of the workers' comp system," he says.

Investigation of a fire in the fall of 1991 that killed 25 workers at a chicken processing plant in Hamlet, N.C., uncovered serious violations. North Carolina was not meeting 18 of the 36 federal U.S. Department of Labor OSHA standards.

The North Carolina tragedy launched an OSHA study of 20 state programs, as well as those in Puerto Rico and the Virgin Islands, that uncovered various violations of federal requirements. State offices were not adequately staffed, were slow in adopting federal requirements, were overlooking too many serious, willfull and repetitive violations and were slack in checking up to see if hazards were corrected.

Another study, by the National Safe Workplace Institute, points out numerous holes in state safety standards. Using 116 points as a perfect score, the study found 22 states that didn't meet half the regulations. California scored highest, with only 18 point.

"The reality is that more and more states are getting involved in safety issues. Until recently most state policy was based on problems people perceived, but there was no coherent road map. The states are starting to take a more comprehensive approach," says Joe Kinney of the National Safe Work-place Institute.

California's score is due in large part to legislation enacted last year that made workplace safety a priority. Employers are now required to establish and implement formal safety programs or face substantial fines set by the state agency.

Though many individual businesses have been able to lower their workers' compensation premiums by putting effective safety and health programs into place, Keith Lessner of the Alliance of American Insurers says there is a variety of federal, state and local programs aimed at improving workplace safety and health but no consensus on which are effective. Lessner, a member of NCSL's blue ribbon panel studying workers' comp reforms, says there is little guidance for states interested in establishing occupational safety and health programs that are fair and cost-effective and, most important, that actually prevent losses.

Some believe that it takes more than safety laws to protect workers. "Government isn't the only player," says Lessner. "Businesses don't need government intervention to create programs to protect workers. Employers, employees, organized labor, insurers, academics, and safety and health professionals, as well as government, affect occupational safety and health." Government can provide the framework to encourage appropriate programs, however, and more states, like California, are considering legislation to strengthen safety standards.

New laws in several states--Virginia, Florida, Louisiana, Georgia, Texas and Oregon--tie workers' compensation to policies for a drug-free workplace. The laws, with some exceptions, forbid benefits if a worker's use of alcohol or drugs was a factor in causing the accident.

The drastic price increases in workers' comp insurance is shifting the focus of workers' comp from a labor-management issue to an economic development issue. Legislators all over the country are hearing stories similar to the one a drywall contractor told an Arkansas legislative committee after his annual workers' comp premium jumped in March from $22,204 to $65,000. "The only way my company can pay for this increase is to raise prices. By doing that, I'll lose business. When I lose business, I have to lay off people," he said.

Legislatures are trying to ease the situation through provisions that allow medical deductibles in workers' comp insurance policies (at least 21 states now allow them) and other stipulations that make coverage more affordable. Some states have adopted alternative insurance financing schemes allowing businesses to self-insure through pooling by employers who are members of professional associations or engage in similar businesses. Self-insurers may now file letters of credit as a form of security, as well as post bonds. Three states--Louisiana, Maine and Texas--have created competitive state funds to provide an alternative funding mechanism.

But reforms don't always make problems go away. Colorado struggled through major workers' compensation reform last year--eventually reducing benefits (now one of the lowest maximum benefits in any state), introducing medical treatment guidelines, regulating fee agreements and attorneys' fees. For the first time ever, legislators turned down an NCCI (National Council on Compensation Insurance) rate increase.

One year later, small business owners still consider workers' compensation their top concern. Jim Henderson, regional advocate for the U.S. Small Business Administration, says passage of the legislation last session "brought smiles to the faces of many small business owners," but at a statewide issues conference this year, they still voted workers' comp their number one issue.

And the new law hasn't kept all business in the state. "A general contractor called early this year to say his Colorado premiums are still too high so he will only bid work outside the state," Henderson says. "For high-risk industries, the recent Colorado reforms are simply not doing enough."

The Colorado law has sharply reduced awards for badly injured workers, prompting a lawsuit to challenge the reforms. Attorney Robert Turner, on behalf of workers injured in recent months, and the Colorado AFL-CIO have asked a district court to declare the law unconstitutional. "Sufficient time has passed for it to be apparent to everyone that [the law has] devestating effects on the seriously injured worker," Turner says.

Colorado is not an exception. Every legislature's attempt at reforming its tangled workers' compensation system has been met only with another round of protest and another round of reform the next session. If the last 10 years are any indication, it's going to take a comprehensive approach by all the players--labor, management, insurers, health care providers, lawyers--to rehabilitate workers' comp. Others believe the system can't be saved and are looking for alternatives. Whatever the school of thought, workers' compensation remains one of the toughest problems facing state legislators. There is a lot to be learned, and some believe that solving the problems of workers' comp will offer insight into how states can deal with the thorny issues of health care generally.

Experts to Have Their Say

A blue ribbon panel made up of distinguished experts representing labor, management, trial lawyers, the insurance industry and the medical community will deliver a series of reports to NCSL's Workers' Compensation Task Force on May 30 at the Assembly on the Legislature meeting in Kansas City.

In a year-long series of meetings, the panel has been searching for workable solutions to workers' compensation problems in five areas--administration permanent partial disability, delivery of medical services, safety and health, and insurance pricing.

The panel's suggestions will help the workers' compensation task force make its recommendations for resolving the recurring problems of the troubled system.

The task force report on what is causing the difficulties in the system and its recommendations for solutions are expected by Dec. 1. Solutions are expected to include alternatives to the system, the feasibility of integrating workers' compensation with other social insurance programs and employer-sponsored health benefit programs.

Costs Keep Going Up

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The average costg of covering a worker grew from $93 in 1972 to $500 in 1990.

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From 1981 to 1989 the average medical claim on lost-time cases jumped 157 percent--from $2,100 to $5,400.

Brenda Trolin specializes in workers' compensation, labor and insurance issues for NCSL.
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Title Annotation:includes related article; workers' compensation systems
Author:Trolin, Brenda
Publication:State Legislatures
Date:May 1, 1992
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